Lessons from La La Land

Can the Turnaround of Los Angeles' Public Hospitals Be Replicated in New York?

This week New York City’s Health and Hospitals Corporation, now known as NYC Health + Hospitals (H+H), the nation’s largest local public hospital system, has a new leader–Dr. Mitchell Katz. Selected based on his successful stint as head of the Los Angeles Department of Health Services (LADHS), which operates county hospitals, he is expected to apply his turnaround skills to the troubled H+H. This policy brief examines the experience in Los Angeles under Dr. Katz and assesses the extent to which the turnaround there can be replicated in New York.

NYC Health + Hospitals: A Deep Financial Hole Keeps Getting Deeper

H+H is in need of a fiscal revival. Its financial position has weakened in recent years and will likely degrade further because key federal funding streams including Disproportionate Share Hospital (DSH) payments are slated to be cut, and a turnaround plan developed in 2016 is proving unworkable.1 The most meaningful indicator of H+H’s financial trouble is its growing dependence on a subsidy from the City of New York. While a modest local subsidy has always been necessary to support H+H’s operations and services for the indigent, its size has grown in recent years as the revenue generated by patient services has fallen short of the growing operating expenses.

As shown in Figure 1, the City subsidy to H+H grew from $607 million in fiscal year 2011 to more than $1.8 billion in fiscal year 2016. This support comes in a variety of forms with the largest item being the City’s funding of the nonfederal share of supplemental Medicaid payments; other subsidies include payment of malpractice claims, payment of debt service obligations, coverage of wage increases from recent collective bargaining settlements, and an unrestricted appropriation.2

From fiscal years 2011 to 2016 the City subsidy to H+H increased from the equivalent of 10.5 percent of annual revenues to 25.9 percent. This local support represents a diversion of taxpayer funds that might otherwise be available to support other municipal services if H+H were able to generate sufficient revenue from its services to patients.

In April 2016 the Mayor presented a plan, One New York: Health Care for Our Neighborhoods, to transform H+H and curb the needed flow of City funds.3 The baseline financial projections for H+H at the time was a deficit that grew from $633 million in fiscal year 2017 to nearly $1.8 billion in fiscal year 2020 despite the continuation of a $1.3 billion annual subsidy from the City. In order to close the gap, the plan called for actions through 2020 that would reduce annual operating expenses by $700 million and raise annual revenues by $1.1 billion. A new Office of Transformation was created within H+H to implement the turnaround.

Since 2016 the One New York strategy has been modified and more fully developed. H+H’s most recent financial plan, summarized in Table 1, projects a baseline gap of $1.9 billion in fiscal years 2020 and 2021. The gap is to be closed with expenditure reductions growing from $118 million in fiscal year 2017 to $748 million in fiscal year 2021 and revenue raising initiatives that grow from $752 million to $1.1 billion over the same period.

The experience of the 21 months since turnaround efforts were initiated indicates the difficulties of the task. With respect to expenditure reductions, H+H reported meeting the fiscal years 2016 and 2017 reduction targets for personnel through a mix of layoffs of nonunion staff and attrition, but continued progress on this front may be problematic due to a desire to avoid layoffs of unionized workers.4 Supply chain savings of $40 million in fiscal year 2016 and $63.5 million in fiscal year 2017 were achieved, but a savings target that more than doubles in fiscal year 2018 may prove harder to achieve.5 Progress on revenue raising initiatives has been slow. The largest component of the turnaround plan for fiscal year 2017 was $545.9 million from a Medicaid waiver to insure the currently uninsured up to 200 percent of the Federal Poverty Level (FPL), but no announcement has been made as to whether this initiative was approved. Amid the difficulties, several leadership positions, including the head of the Transformation Office, have become vacant as Dr. Katz is given an opportunity to assemble his own senior team.

Why Los Angeles’ Experience Is Relevant

Dr. Katz’s record in Los Angeles is encouraging in two important ways. First, Los Angeles shares many health market features with New York City, and, second, the financial performance of the public hospitals in Los Angeles improved markedly during his tenure.

New York City and Los Angeles County (LAC) have similarly sized, ethnically diverse populations with large undocumented populations, and roughly one in five residents have incomes below the federal poverty threshold. (See Table 2.) LAC and New York City are both located in Medicaid Expansion states and have comparable uninsured rates: 10.9 percent and 9.1 percent respectively. New York City’s Medicaid enrollment rate is slightly higher than LAC’s.6 (California’s Medicaid program is called Medi-Cal.)

Perhaps due to its large geographic area, LAC houses more general care hospitals (110) than New York City (47), but New York’s hospitals are larger and the ratio of hospital beds to population is somewhat higher in New York. The LADHS serves as the county’s public and mental health department and operates four hospitals and a network of outpatient facilities. LADHS operates the second largest local public hospital system in the country after H+H and is the second largest provider of health care services in its county.7

Perhaps the most significant difference between the two systems is that LADHS accounts for a smaller market share of most services than Health + Hospitals. The four county hospitals (Harbor-UCLA, LAC+USC, Olive View-UCLA Medical Centers and Rancho Los Amigos National Rehabilitation Center), account for 5 percent of the county’s staffed beds and 6 percent of the county’s discharges. In New York City, H+H’s 11 hospitals account for 20 percent of staffed beds and 17 percent of discharges. The difference in roles is especially notable with respect to behavioral health care. In New York City H+H accounts for 35 percent of psychiatric discharges; LADHS’ share is less than 3 percent.8

The improvement in the financial performance of the Los Angeles public hospitals is evident in two statistics. (See Table 3.) First, the operating margin for the four hospitals combined went from -8 percent in 2010 (when Dr. Katz took over) to +8 percent in 2015; that is, a $177 million deficit was converted to a $247 million surplus. Second, the reliance on county appropriations was reduced from 30 percent of total revenue to 15 percent; that is, county taxpayer support dropped from $699 million to $470 million. The hospitals still required a county subsidy to balance their budget, but the scale of the subsidy was reduced significantly.

How Things Got Better in Los Angeles

How did LADHS achieve this turnaround in financial performance? The answer is not that it cut expenses. Over the five-year period operating expenses increased 15 percent. At the same time inpatient discharges dropped 17 percent and outpatient visits declined 4 percent, suggesting substantial increases in unit costs for these services. (See Tables 3 and 4.)

The good news was all on the revenue side. The largest source of revenue, payments for services to patients, grew 40 percent from $1.6 billion to more than $2.2 billion. Despite the drop in volume of services, the hospitals were able to collect more money per unit of service. This is partially attributable to changes under Dr. Katz that both improved the fiscal health of the hospitals and enhanced the quality of care patients received. His operational reforms include re-organizing outpatient care delivery, implementing the medical home model, partnering with social service agencies to address social determinants of health, and implementing an electronic health records system and e-Consult. 9 These are all improvements applicable to and partly underway at H+H, but broader changes in the health care industry likely had more direct impact on the Los Angeles public hospitals’ revenues.

The primary reason for the gain in revenues was an improved “payor mix;” that is, the source of payment for patients shifted to third parties that pay better rates. As shown in Table 4, from 2010 to 2015 uninsured patients fell from 34 percent to 10 percent of total discharges and from 49 percent to 20 percent of outpatient visits. At the same time patients covered by Medi-Cal increased from 50 percent to 71 percent of inpatient discharges and from 36 percent to 63 percent of outpatient visits. Since uninsured patients pay little or nothing toward their cost of care and Medicaid payments from the State cover much of the cost of care, this shift in payor mix benefited the bottom line greatly.

The increased Medi-Cal utilization was largely due to Medi-Cal enrollment expansion supported by the federal Affordable Care Act. This expansion began in January 2014 and caused the number of uninsured people in LAC to decline 51 percent, while the Medi-Cal enrolled population grew 60 percent.10 County hospitals realized their first revenues related to expansion in fiscal year 2014; they totaled approximately $333 million growing to $794 million in fiscal year 2015.11

Before and during Medi-Cal expansion, LAC and the State took steps to expand coverage and aid public hospitals. Using a federal waiver, the County launched the “Healthy Way LA” program in 2011 that enrolled single adults with incomes below 133 percent of the federal poverty threshold in an insurance-like arrangement. The program preferentially assigned participants to County facilities for services thereby opening up a new source of patient revenues: in fiscal year 2010, LAC inpatient facilities earned $21.5 million in patient revenues from county indigent programs, and by fiscal year 2011 that had grown to $398.6 million.12 Health Way LA essentially pre-enrolled approximately 22 percent of the individuals who would eventually be included in the Medi-Cal expansion population and fostered patient loyalties between these individuals and County facilities.13 Once these individuals gained Medi-Cal coverage, they were more likely to continue using County facilities. Also critical was State legislation that required Medi-Cal managed care plans to preferentially assign newly eligible Medi-Cal patients to the county system.14

Another important source of added revenue was California’s Bridge to Reform Medicaid Waiver in effect from 2010 to 2015. One component of that waiver, Delivery System Reform, provided incentive payments to public hospitals tied to care delivery improvements. LADHS hospitals started receiving the funding in fiscal year 2011; as a result “other operating revenues” grew from $38 million in fiscal year 2010 to $299 million in fiscal year 2011, and the funding continued into fiscal year 2015.15

In addition to improvements in the payor mix, County facilities benefited from higher payments for patients with some types of coverage. California introduced a policy of reimbursing 100 percent of a provider’s cost for services to newly insured Medicaid patients.16 LAC created a new source of indigent care funding: Healthy Way LA patients who were unable to transition to Medi-Cal (because they were undocumented, for example) were transitioned to a program called “My Health LA” or to a similar program called “Ability to Pay” that effectively insured those individuals at the County’s expense, and County facilities were given preference for their care.17It is likely that some of the decline in direct county appropriations was redirected to these alternative patient care payment programs.

How New York’s Current Problems Differ From Those Solved in Los Angeles

Dr. Katz’s success in Los Angeles was facilitated by (1) revenue opportunities arising from the Affordable Care Act, notably the Medi-Cal expansion, and (2) a state and local policy environment that gave county facilities preference in the assignment of patients and allocation of incremental funds. The current situation in New York City provides important contrasts.

The Affordable Care Act and its Medicaid expansion have already been implemented in New York and any gains for H+H have largely been realized. The potential for additional gains, particularly in the form of an improved inpatient payor mix, are limited. As shown in Table 5, H+H’s inpatient payor mix shifted favorably between 2011 and 2015 with an increase in the share of Medicaid patients from 52 percent to 64 percent and a decrease in the uninsured from 6 percent to 4 percent. The latter figure is well below the LADHS share of 10 percent, and as such the potential for further improving the payor mix for H+H is highly limited because of the already low share of uninsured inpatients.

There is more opportunity for improvement with respect to outpatient services. The share of H+H outpatient visits (excluding the emergency room) that were uninsured grew between 2011 and 2015, and in 2015 25.2 percent of adult visits and 7.7 percent of pediatric visits were uninsured.18 Attention can be given to improving the outpatient payor mix. In addition Medicaid payments for outpatient services often fall below costs; new State policies with respect to these rates may be needed to aid H+H’s bottom line.

The new challenges Dr. Katz will face in New York relate to better integrating H+H with the overall hospital system and reducing H+H expenditures.19 In New York, H+H is a larger share of the total health care market than LADHS facilities are in Los Angeles. A strategy for improving H+H finances may require shifting selected services, notably uninsured outpatient visits, from the public to the private sector. In 2014 80 percent of uninsured clinic visits in New York City were at a H+H facility; this source of fiscal stress can and should be shared more widely within the health care system.20

The systemwide distribution of psychiatric services in New York City is another source of stress for H+H. While accounting for only 17 percent of overall inpatient discharges, H+H facilities account for 60 percent of schizophrenia discharges, 50 percent of bipolar disorder discharges, and 44 percent of major depressive disorder discharges in the City.21 Many of these patients not only are not well insured, but present behavioral challenges and other obstacles to continuity of care and orderly management of facilities. Decreasing the concentration of these patients in H+H would potentially improve their care and enable H+H to improve its operations.

With respect to expenditures, H+H likely will have to do more cost containment than was evident in Los Angeles. Bold moves may be needed to achieve or expand the $748 million in savings sought by 2020 in the current plan. A comparison of relative costs per discharge revealed that H+H facilities have room to improve the efficiency of their operations: the average cost per discharge (adjusted for case mix) at a H+H facility was $20,170 in 2015, 22.6 percent more than the average at New York City voluntary facilities.22

Finally, intergovernmental relations are more challenging now in New York. While H+H, like LADHS, has strong support from its sponsoring local government, the state and federal contexts are different. Dr. Katz achieved a fiscal turnaround in an era of favorable federal policies including implementation of the Affordable Care Act and helpful Medicaid waivers. Currently, and in the foreseeable future, federal policy is more problematic. Provisions of the Affordable Care Act and support for Medicaid are being threatened, and existing waivers may not be renewed. New York State policy has historically been more favorable to voluntary hospitals than municipal hospitals in the distribution of State-controlled funds, a contrast to the political dynamic in California.23 Further complicating the situation in New York is the much publicized tension between the Mayor and the Governor.

Few people come to New York expecting an easy professional life, and Dr. Katz is a seasoned professional who knows the job will be tough. All New Yorkers who want their local government to continue to provide a safety net of medical care that is worthy of a large and diverse city should welcome him and support the efforts needed to overcome these unique challenges.

The need for systemwide integration is well articulated in Barbara Caress and James Parrott, On Restructuring the NYC Health+Hospitals Corporation: Preserving and Expanding Access to Care for All New Yorkers (New York State Nurses Association, October 2017), https://www.nysna.org/sites/default/files/attach/419/2017/09/RestructuringH%2BH_Final.pdf.

Barbara Caress and James Parrott, On Restructuring the NYC Health+Hospitals Corporation: Preserving and Expanding Access to Care for All New Yorkers (New York State Nurses Association, October 2017), https://www.nysna.org/sites/default/files/attach/419/2017/09/RestructuringH%2BH_Final.pdf.

Barbara Caress and James Parrott, On Restructuring the NYC Health+Hospitals Corporation: Preserving and Expanding Access to Care for All New Yorkers (New York State Nurses Association, October 2017), https://www.nysna.org/sites/default/files/attach/419/2017/09/RestructuringH%2BH_Final.pdf. These data may understate the role of Health + Hospitals in mental health services because many of its patients with other primary diagnoses may also have mental health issues.